Debt Talks' Impasse
Masks Real Progress

By

Gerald F. Seib

June 28, 2011

Bipartisan talks on cutting the budget deficit and, in the process, avoiding default on America's debt appear to be in crisis mode. But there are two reassuring realities just beneath the surface drama:

First, Washington's long-term attitudes about spending and debt are slowly but surely changing. Second, as a result, a meaningful short-term deficit deal should be within reach.

These realities aren't apparent from the news that deficit-cutting talks led by Vice President Joe Biden have reached an impasse; that the top Republican in those talks, House Republican Leader Eric Cantor, has withdrawn; or that President Barack Obama swooped in for an emergency meeting with Senate Republican Leader Mitch McConnell Monday in a seemingly last-ditch effort to save the talks.

And it's entirely possible Washington's leaders could still blow the chance to come up with a deal to start significantly reducing the deficit.

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If the effort does fail, Republicans in Congress say they won't agree to raise the nation's debt ceiling by Aug. 2. In that case, the government could begin, for the first time, to default on its debt obligations.

So, yes, Washington can still mess it up in this game of chicken. But the current theatrics obscure a very real change in attitudes that already has occurred in the capital.

The significance of this change isn't obvious, because the federal government is more like an aircraft carrier than a speed boat. It's big and powerful and slow to turn around. But in the past six months, the ship has indeed started to turn. Simply look at some of the signs:

While their approaches still vary wildly, both Mr. Obama and his ideological opposite, Republican Rep. Paul Ryan of the House Budget Committee, have released budget plans that broadly agree that cutting projected deficits by about $4 trillion over the next decade is the right thing to do. That's a significant convergence on at least the goal.

Hitting the Ceiling

Meanwhile, spending discipline is starting to set in. Mr. Obama, a Democrat, has proposed a budget that actually would reduce spending over the next decade on discretionary domestic programs—all those non-defense federal programs Democrats love—and cut those programs as a share of gross domestic product to 1.8% from 3.4%.

Republican leaders say their members are far more willing to cut defense than they would have been even a year ago.

Sacred cows are starting to be slaughtered. A broad bipartisan majority of the Senate voted this month to end more than three decades of federal subsidies for ethanol. In that vote, 33 Republicans and 40 Democrats and Independents—liberals, moderates and conservatives—came together to save $6 billion a year on a program once beyond reach. Just last December, Congress had voted to extend the ethanol subsidy.

And finally, the most sacred of cows, entitlement programs for the elderly, are on the table for consideration. A consensus on how to deal with them remains a ways off, to be sure, but Mr. Ryan actually proposed a meaningful change in Medicare's structure and may live to tell about it. Democrats acknowledge curbs in Medicare will have to be part of any budget deal. Even the AARP, the premier senior citizens' lobby, agrees Social Security benefits may have to be curbed to preserve the program.

All this has happened in the course of this year, illustrating that the debate in Washington has shifted from whether to cut spending to how much and how fast to cut spending.

Which means the basis for a short-term deficit deal is there. The talks have broken down for a seemingly simple reason: Republicans don't want to include any tax increases in a deficit-reduction deal. But that dispute obscures the more stunning reality that negotiators appear to have agreed, at least in principle, on a big chunk of spending cuts. There's some disagreement over the precise total, but it is likely in the range of $2 trillion in cuts over 10 years. That also once would have been almost unthinkable.

Even the dispute over taxes seems manageable. Democrats aren't trying to raise tax rates; they have mostly thrown in the towel on that idea. They're trying instead to raise revenue by going after what White House spokesman Jay Carney Monday referred to as "subsidies and loopholes"—in particular, tax advantages enjoyed by the oil-and-gas industry, as well as deductions that tend to be used by the wealthy, and some business deductions.

Republicans want such revenue increases accompanied by tax cuts elsewhere, but even some Democrats want some tax cuts that in the short run might rev up the economy. If Republicans are willing to take yes for an answer on spending cuts, and Democrats don't choose this moment to take their stand on tax rates, the deal seems doable.

Meanwhile, those waves you see are from the aircraft carrier changing directions.

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